European court rejects Microsoft's appeal

JohnLetzing

SAN FRANCISCO (MarketWatch) -- Shares of Microsoft Corp. slipped Monday after a European court endorsed penalties previously leveled against the software giant by antitrust regulators.

The European Court of First Instance rejected an appeal by Microsoft
MSFT, +0.00%
to annul a 2004 antitrust decision by the European Commission, upholding a fine of 497 million euros, or $689 million.

While the fine itself isn't significant for a company with more than $23 billion in cash and equivalents, one analyst said the ruling reminds investors that the "antitrust issue" will remain for the foreseeable future.

"This shows that the ongoing headache they've had with antitrust continues," said Brendan Barnicle of Pacific Crest Securities. "A lot of investors had forgotten about this over the last year or so. They're going to have to be mindful of it in the future."

Deutsche Bank analyst Todd Raker wrote in a note to clients that Monday's ruling may "add momentum" to a separate complaint now before the European Commission, regarding the openness of file formats required for Microsoft's Office software applications. Raker called Monday's ruling an "incremental negative."

Microsoft did not immediately indicate whether or not it will appeal the ruling to the European Court of Justice.

Shares of Microsoft fell more than 1% by the close of trading Monday, to $28.73.

Kevin Buttigieg of A.G. Edwards downplayed the significance of the ruling, noting that the company already has brought itself into compliance with many of the issues originally raised by the commission.

"It isn't likely to change Microsoft's markets in the near or intermediate term, in our opinion," Buttigieg wrote in a note to clients.

Competition claim rejected

Europe's second-highest court agreed with the European Commission that Microsoft abused its dominant position by failing to make its products compatible with those of rivals, and by bundling software products together with its core operating system software.

The court rejected "Microsoft's claims that the degree of interoperability required by the commission is intended in reality to enable competing workgroup-server operating systems to function in every respect like a Windows system, and accordingly, to enable Microsoft's competitors to clone or reproduce its products."

Arguments made by the regulator about Microsoft's bundling of Windows Media Player with its operating system were "well founded," the court said in its ruling on the nine-year-old case. See text of ruling.

One minor victory for Microsoft was that the European court announced that a monitoring trustee was not legal.

Neelie Kroes, the European Commission's competition commissioner, said that the case sets a precedent on the obligations of "dominant companies" to allow competition, notably in high-tech industries.

Microsoft's general counsel, Brad Smith, noted that the decision would not alter the company's current strategy or product development, as it has been required to abide by the commission's decision concurrent with its appeal.

"We welcome the opportunity for continued discussion to adhere to our duties with the European Commission, and we look forward to hopefully continuing to move technology forward to create more jobs on this continent," Smith said in a statement.

Ted Henneberry, the co-chair of the European practice group at Heller Ehrman, commented he found it puzzling that the court would limit the ability for Microsoft to integrate features into its products.

"I would just contrast [the ruling] with the European Commission's stated philosophy of trying to encourage R&D. I'm afraid Europe is coming down on the side of protecting competitors and not consumers," he said.

Henneberry's firm previously represented Microsoft in private litigation, but not in any of the government cases.

Other large U.S. companies now under close scrutiny by antitrust regulators in Europe include Intel Corp.
INTC, +0.83%
and Rambus Inc.
RMBS, +0.85%

Sun's complaints

Microsoft's troubles in Europe began in the 1990s, when rivals such as Sun Microsystems Inc.
JAVA, +0.00%
complained to the European Commission about its anticompetitive behavior.

In turn, Microsoft has complained that the commission has been critical, without offering specific remedies for it to follow. In a mandated effort to increase the compatibility of its products, Microsoft has begun compiling protocols, or blueprints for the way its products interact, for its rivals' perusal.

Microsoft has said that regardless of the Court of First Instance's opinion on its appeal, it will continue producing protocols.

In addition to products like Microsoft's Vista, other products likely to come to the attention of European antitrust regulators in the future include computer chips. In July, the European Commission charged Intel with behavior that was unfairly cutting rival Advanced Micro Devices Inc.
AMD, -1.27%
out of certain markets by using rebates.

In addition, chipmaker Rambus also has been accused by the European Commission of anticompetitive behavior by not properly disclosing patents for which it later sought royalty payments from its rivals.

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